Question

Synovec Corporation is expected to pay the following dividends over the next four years: $6.90, $17.90, $22.90, and $4.70. Afterward, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price?

Answer 1

The current price of the stock is $126.55

Step-by-step explanation:

The current price per share can be calculated using the dividends discount model where by future dividends are discounted back to the present value to calculate the price of a stock. The formula that will be used for this stock is as follows,

P0 = D1 / (1+r) + D2 / (1+r)^2 + D3 / (1+r)^3 + D4 / (1+r)^4 +

[ (D4 * (1+g) / (r - g)) / (1+r)^4 ]

P0 = 6.9 / (1+0.1) + 17.9 / (1+0.1)^2 + 22.9 / (1+0.1)^3 + 4.7 / (1+0.1)^4 +

[ (4.7 * (1+0.06) / (0.1 - 0.06)) / (1+0.1)^4 ]

P0 = $126.55